Argument: Public option monopoly squeezes health care suppliers, doctors

Issue Report: Public health insurance option


Gregory Mankiw. “The pitfalls of the public option”. New York Times. June 27, 2009: “Which raises the question: Would the existence of a dominant government provider of health insurance be good or bad?

It is natural to be skeptical. The largest existing public health programs — Medicare and Medicaid — are the main reason that the government’s long-term finances are in shambles. True, Medicare’s administrative costs are low, but it is easy to keep those costs contained when a system merely writes checks without expending the resources to control wasteful medical spending.

A dominant government insurer, however, could potentially keep costs down by squeezing the suppliers of health care. This cost control works not by fostering honest competition but by thwarting it.

Recall a basic lesson of economics: A market participant with a dominant position can influence prices in a way that a small, competitive player cannot. A monopoly — a seller without competitors — can profitably raise the price of its product above the competitive level by reducing the quantity it supplies to the market. Similarly, a monopsony — a buyer without competitors — can reduce the price it pays below the competitive level by reducing the quantity it demands.

This lesson applies directly to the market for health care. If the government has a dominant role in buying the services of doctors and other health care providers, it can force prices down. Once the government is virtually the only game in town, health care providers will have little choice but to take whatever they can get. It is no wonder that the American Medical Association opposes the public option.

To be sure, squeezing suppliers would have unpleasant side effects. Over time, society would end up with fewer doctors and other health care workers. The reduced quantity of services would somehow need to be rationed among competing demands. Such rationing is unlikely to work well.

FAIRNESS is in the eye of the beholder, but nothing about a government-run health care system strikes me as fair. Squeezing providers would save the rest of us money, but so would a special tax levied only on health care workers, and that is manifestly inequitable.”

“The End of Private Health Insurance”. Wall Street Journal (editorial). April 13, 2009: “Much like Medicare, overall spending in the public option will be controlled over time by paying less for medical services, drugs and technology. With its monopsony purchasing power, below-market fees will be dictated on a take-it-or-leave-it basis — an offer hospitals and physicians won’t be able to refuse. Medicare’s current reimbursement policies pay hospitals only 71% of private rates, and doctors 81%, according to the Lewin Group.”